Crude oil prices continue to take a beating and are seemly dragging the entire market lower this past week. A market concern now is the fact the price of a barrel of WTI crude has broken longer term support that had been in place for twenty years as can be seen in the chart below.
Market participants have a new worry if crude does not rebound to reclaim this long term support level--the free fall will continue. The next support level is just above $50 per barrel and if that does not hold, the mid $30 per barrel price could come in to play.
More importantly, fundamentally, what is behind this price decline? The fact OPEC could not come to an agreement on production reductions has put the blame for the decline on oversupply. Supply is a significant contributor to the decline. We also believe demand for oil is playing a role as well as we noted in a post earlier this week. Earlier this month OPEC reduced its 2015 demand forecast and Friday the International Energy Agency reduced oil demand for 2015. The issue that rises to the top then is whether or not this potential demand reduction is a sign of a global economy that is entering a period of significantly slower growth, i.e., entering a global recession. At this point in time we believe this does not occur and the U.S. weathers the slow down that is occurring outside its borders.
From a pure technical perspective we believe oil and energy related stocks are trading at extreme oversold levels. The first chart below is WTI crude and the technical indicators below the chart are indicating extreme oversold levels and possibly a bounce can occur in the coming trading days. Additionally, the S&P energy sector as represented by the SPDR Energy Sector ETF (XLE) is similarly trading at oversold levels.
As they say, "the trend is your friend" and in the case of oil and energy, the trend is in the wrong direction. Investors stepping up to buy into this sell off in those stocks negatively impacted by the energy slide feel as though they may be catching a falling knife. However, for long term investors, a number of stocks are beginning to offer entry points that could be rewarding longer term.
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